After losing two patent cases before the appellate courts of a Western democracy, should a disgruntled foreign multinational pharmaceutical company be free take that country to private arbitration claiming that its expectations of monopoly profits had been thwarted by the courts’ decisions? Should governments continue to negotiate trade agreements where expansive Intellectual Property-related investor rights and investor-state dispute settlement (ISDS) are enshrined into hard law? Should we be concerned about the impact of billion dollar arbitral judgments on the willingness of governments to regulate pharmaceutical companies and to corral their efforts to expand their patent and data protection monopolies? Ultimately, should policy makers be concerned about the impact of investor rights on the affordability and accessibility of medicines both in rich and low- and middle-income countries?
The answers to these questions become more urgent given proposed IP and Investment Chapters in the Trans-Pacific Partnership Agreement (TPP)[i] and the recent NAFTA investor dispute notifications by Eli Lilly against Canada.[ii] The Eli Lilly case clarifies the risks of including IP rights in investment chapters and the boundary-pushing claims that can be brought on behalf of foreign pharmaceutical companies.
IP investor rights in the draft Trans-Pacific Partnership
The definition of investments in the draft TPP is certainly broad enough to cover pharmaceutical-related Intellectual Property Rights (IPRs) (i.e., patents, regulatory data, and other trade secrets) in that it only requires “commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk (emphasis added).”[iii] More to the point, the proposed definition directly includes “intellectual property rights [which are conferred pursuant to domestic laws of each Party].”[iv]
With respect to treatment of IP and other investment rights, Article 12.6.1 of the Draft TPP Investment Chapter requires that, as a minimum standard of treatment, “Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.” Subparagraph 2(a) interprets “fair and equitable treatment” to include “the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” The most elastic interpretations of this requirement suggest that minimum standard of treatment protects all “reasonable expectations” of an investor even in the absence of direct representations.[v] In the pharmaceutical context, foreign investors might claim that the minimum standard of treatment covers their reasonable expectations for profits arising from the granting or even filing of IP claims. Thus, changing or re-interpreting substantive IP standards or guidelines judicially, administratively deciding patent oppositions in favor of challengers, or adjudicating limitations and exceptions to granted rights might all be interpreted as violating a minimum standard of treatment.
Article 12.12 of the Draft TPP Investment Chapter also prohibits direct and indirect expropriation of a covered investment, which includes failure to pay full market value upon expropriation. Although there is an exception in subparagraph 5 with respect to “compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement,” this exception would not appear to cover exceptions to data exclusivity nor many other patent-related limitations and exception. Even the broader bracketed portion of subparagraph 5, which includes an exception to the expropriation rule for “the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation, or creation is consistent with Chapter __ (Intellectual Property Rights),” does not give rights to create novel exceptions to intellectual property rights in the absence of full remuneration. Pursuant to the indirect expropriation rule, it would become unlawful, arguably, to create a public health exception to data exclusivity or to adopt stricter standards for inventions as the US Supreme Court has recently done in the Myriad case.
Possible meanings of indirect expropriation are addressed further in proposed Annexes 12-B, C, and D and clarify the duty to protect investor expectations. Annex 12-C requires a case-by-case, fact-based inquiry that considers subparagraph 4(a) factors:
(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which government action interferes with distinct, reasonable investment-backed expectations (emphasis added); and (iii) the character of the government action.
Subparagraph (b) places some loose boundaries on those expectations:
Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect the legitimate public welfare objectives [23 For greater certainty, the list of legitimate public welfare objective in this subparagraph is not exhaustive] such as public health, safety, and the environment, do not constitute indirect expropriations.
Although this public welfare exception is helpful, it does not confer an absolute privilege. Investors can still claim that: (1) decisions adversely affecting their IPRs do not advance legitimate public welfare objectives; (2) their rights are rare instances where non-discriminatory regulation is not allowed; and (3) the challenged regulatory actions are discriminatory, for example by specifically targeting pharmaceutical investors.
In addition to supporting unfair treatment and expropriation claims, the Draft TPP Investment Chapter also has typical provisions on national treatment (treating foreign investments and investors no less favorably than domestic ones) and most-favored nation (treating foreign investment and investors of any Party no less favorably than investments or investors of any other Party or non-Party).[vi]
Eli Lilly v. Canada – investor claims unbound
The potential impact of the TPP’s proposed rights to foreign investors can be seen in pending claims against Canada. On November 2, 2012, Eli Lilly filed a North American Free Trade Agreement (NAFTA) notice of intent to arbitrate claiming $100 million CAD against Canada. The dispute centers on a decision by Canada’s Federal Court of Appeal that invalidated Eli Lilly’s patent on Strattera, an attention-deficit hyperactivity disorder medicine; an appeal of that decision was dismissed by the Supreme Court of Canada. Subsequently, following the invalidation of a different patent on the psychiatric medicine Zyprexa, its affirmance by the Federal Court of Appeal, and a denial of a subsequent appeal to the Supreme Court, Eli Lilly filed a second notice of intent to arbitrate, now claiming $500 million CAD with respect to the two medicines. In ruling against Eli Lilly, the Federal Court of Appeals in both cases held that the utility of a patent is determined by inventive promise that the applicant has made either directly or by “sound prediction” and that such a promise or prediction must be disclosed in the patent application.
In essence, Canadian courts have interpreted the industrial applicability/utility element of patentability to require that a patent claim must disclose a claimed utility. If there is no specific promise of utility, there must be at least a “scintilla of utility” discernable in the application. However, if the applicant goes further and directly or indirectly predicts or promises a specific utility, then that prediction or promise must be supported by evidence disclosed in the patent application. Since Eli Lilly essentially claimed or “promised” long-term therapeutic benefits with respect to Strattera and both long-term and reduced side effects with respect to Zyprexa, the courts reviewed the applications for evidence of the same and found them wanting.
Eli Lilly asserts that both the Canadian promise doctrine and the related disclosure requirement go well beyond normal practice in the United States and European Union, and that these additional requirements are not found in the Patent Cooperation Treaty (PCT), an international patent law treaty.[vii] In essence, Eli Lilly seeks to challenge both the invalidation of its two patents and the Canadian promise/disclosure utility doctrine in its entirety.[viii] To accomplish this, Eli Lilly claims violations of minimum standard of treatment, indirect expropriation, and national treatment norms.
With respect to minimum standard of treatment, Eli Lilly claims that its expectations of profit were unjustly upset by Canada’s judicial adoption of novel utility and disclosure standards. Eli Lilly claims that this judge-made law, different from that used elsewhere, altered the legal framework governing its investments and violated its “most basic and legitimate expectations of a stable business and legal environment.”[ix] It argues that it “could not have anticipated that the requirement for utility at the time of its investment (a “mere scintilla”) would be so drastically altered by the adoption … of the doctrine of ‘promise of the patent’ … .”[x] As of the time of its investment, Eli Lilly argues that it “reasonably relied on disclosure obligations that were enshrined in domestic law through incorporation by reference of PCT requirements and could not have anticipated that non-statutory, new and additional disclosure obligations adopted years later would be retroactively applied to invalidate the Strattera Patent.”[xi] In sum, Eli Lilly asserts: “The measures … violated the ‘full protection and security’ requirement of Article 1105(12), which likewise includes basic requirements of legal security.”[xii]
With respect to expropriation, Eli Lilly claims both direct and indirect expropriation.[xiii] The direct expropriation claim seems preposterous given unanimous jurisprudence limiting that concept to governmental seizure of real property. The indirect expropriation claim, on the other hand, is more subtle. Here Eli Lilly claims: “The judicial decisions invalidating the Strattera and Zyprexa Patents are illegal from the perspective of international law and therefore constitute an expropriation (emphasis added).”[xiv] It claims further: “The Government of Canada has a positive obligation to ensure Canadian law complies with Canada’s international treaty obligations, as well as the reasonable investment-backed expectations of the investor.”[xv]
Despite a clause sheltering NAFTA-compliant patent revocations from expropriation disciplines, similar to a comparable clause in the TPP, Eli Lilly has made claims not just based on NAFTA’s IP chapter but on IP rules imported from outside the text. In particular, Eli Lilly alleges that Canada’s promise/disclosure rules violate: (1) the TRIPS Agreement, which was not even operative when NAFTA was negotiated,[xvi] (2) the PCT, which expressly covers procedural elements of patent applications, not substantive patenting standards,[xvii] and (3) the Paris Convention for the Protection of Industrial Property,[xviii] which literally has no relevant provision on standards for deciding utility.
Eli Lilly’s last major investment claim charges national treatment discrimination. It is here that Lilly’s efforts to incorporate foreign IP norms reaches its apex. Instead of comparing treatment accorded to foreign and domestic firm under Canadian law, Eli Lilly draws on utility and disclosure standards used in the US and EU. Thus, Eli Lilly states:
The measures in issue de facto discriminate against Lilly, a U.S. investor, when compared to domestic investors, by requiring the Strattera patent (which was filed on the basis of an international application) to meet elevated and additional standards for utility and disclosure that are not required by the laws of the United States of America, the European Union, or the harmonized PCT [Patent Cooperation Treaty] rules. The measures in issue disadvantage foreign nationals and render their patents especially vulnerable to attack by insisting on proof of utility and disclosure of evidence that is not required by the foreign applicants’ own national jurisdictions or international rules. (Emphases added.)[xix]
As a final feature of this topsy-turvy national treatment analysis, Eli Lilly argues that Canada’s patent invalidations somehow advantage Canadian generic companies that can now freely produce and market generic versions of Strattera and Zyprexa thereby being able to reap the economic benefits associated with Lilly’s investments, thus destroying Lilly’s [exclusive] market share and associated profits.[xx]
Under the logic of Eli Lilly’s investor-state claim, foreign investors’ expectations have now become unbound. Even the doctrine of legitimate expectations, which is itself a huge stretch of operative minimum standard of treatment principles, is no longer tethered to operative due process (minimum standard of treatment) or to promises of regulatory coherence (indirect expropriation) or to equal treatment compared to domestic firms (national treatment). Instead Eli Lilly hitches its investment expectation to the best deal on IP achieved anywhere else. Moreover, it suggests that its expectations tolerate movement on IP policy in only one direction—upward. Any prudent diminution of patent or data right expectations could result first in the loss of a ISDS claim and second in reduced access to affordable medicines.
There are many reasons to strike the Draft TPP Investment Chapter, a chapter that restricts government sovereignty to regulate business activities while simultaneously ceding de facto regulatory power to foreign investors and private arbitrators. Moreover, far too little attention has been given to the grave risks that the Investment Chapter poses to access to medicines. Big Pharma has had a big hand in the US’s proposed TPP IP Chapter and now is pushing the Investment Chapter as well. TPP Parties should reject both TRIPS-plus IP and investment provisions that will ill advisedly restrict their ability to safeguard the health of their people. Accordingly, the best solution with respect to IP-specific investment claims, and to the broader risks of investor-state claims altogether, is to delete the Investment Chapter entirely—a second-best solution is to more explicitly and effectively exclude coverage of intellectual property rights and their enforcement.
Brook K. Baker is a professor at Northeastern University School of law and affiliate of its Program on Human Rights and the Global Economy; he is also an Honorary Research Assistant at the University of KwaZulu Natal and a Senior Policy Analyst for Health GAP (Global Access Project).
[i] See generally US sources on the TPP available at http://www.ustr.gov/tpp; Trans-Pacific Partnership, Intellectual Property Rights Chapter September 2011 Draft (Selected Provisions), available at http://www.citizenstrade.org/ctc/wp-content/uploads/2011/10/TransPacificIP1.pdf; Draft TPP Investment Chapter, available at http://www.citizenstrade.org/ctc/wp-content/uploads/2012/06/tppinvestment.pdf;
[ii] Eli Lilly and Company v. The Government of Canada, Notice of Intent to Submit a Claim to Arbitration under NAFTA (Nov. 7, 2012) (Eli Lilly I), available at http://italaw.com/sites/default/files/case-documents/italaw1172.pdf. More recently a second notification of intent to claim arbitration has been filed (June 13, 2013) (Eli Lilly II), available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/eli-02.pdf.
[iii] Article 12.2.
[iv] Article 12.2(g).
[v] See Fiona Marshall, Fair and Equitable Treatment in International Investment Agreements, Institute for Sustainable Development (2007), available at http://www.iisd.org/pdf/2007/inv_fair_treatment.pdf.
[vi] See Articles 12.4 and 12.5.
[vii] Eli Lilly II, supra note ii, at ¶¶ 56-66, 79-84, 98, 104.
[viii] Id. at ¶ 99.
[ix] Id. at ¶ 111.
[x] Id. at ¶ 112.
[xi] Id. at ¶ 113.
[xii] Id. at ¶ 114.
[xiii] Id. at ¶¶ 102-103.
[xiv] Id. at ¶ 103.
[xv] Id. at ¶ 106.
[xvi] Id. at ¶¶ 6, 9-11,17, 27-28, 30, 32, 42, 49, 52, 60, and 104.
[xvii] Id. at ¶¶ 19-21, 23-26, 28, 33,56-57, 60, 63, 65, 79, 104, 113, 117.
[xviii] Id. at ¶¶ 34, 104.
[xix] Id. at ¶ 117.
[xx] Id. at ¶ 118.